The Market Today
European Sovereign Yields Lead Treasury Yields Higher Overnight
by Craig Dismuke, Dudley Carter
Today’s Calendar – Slow Economic Calendar Should Leave Markets Focused on Corporate Earnings: The economic calendar is relatively light today and the reports to be released all come after markets open. Markit will release its latest U.S. PMIs at 8:45 a.m. CT with economists expecting only modestly changed readings; manufacturing is expected to be slightly stronger and services slightly softer. Positive PMI results in Europe were one of the catalysts driving sovereign yields higher overnight (more below). While the ISM surveys have historically carried more weight in the U.S., this morning’s PMI will be of interest because they provide a first glimpse at activity in October. The September ISM data was notably distorted by hurricane activity. Shortly after the PMIs are released, the Richmond Fed will report its manufacturing activity index for October. The recent regional Fed reports have been solid.
Tuesday is another busy day for corporate earnings which will likely attract most of the market’s attention. Already this morning, 3M and General Motors posted better than expected quarterly earnings while McDonald’s results fell short of the consensus. U.S. equity futures were up following the pre-market earnings reports, the Dow’s 0.5% jump putting the blue-chip index out in front.
Overnight Activity – European Yields Give Treasury Yields a Boost: The Euro has recovered overnight and European yields are leading U.S. Treasury yields higher after a round of solid economic data in the region (see Chart of the Day below). European yields moved higher at the open but the biggest jump followed a stronger-than-expected PMI in France. The composite PMI improved unexpectedly to 57.5, a more-than-six-year high. The gains were built on gains in both the manufacturing and services PMIs. In Germany, both the manufacturing and services PMI cooled but the manufacturing data was slightly stronger than expected. The composite PMI fell in response but remains at one of its stronger levels in years. The approaching ECB decision is likely also driving a portion of the moves. The ECB is expected to announce changes to its QE program when its meeting concludes on Thursday. The global upward pressure has Treasury yields higher and the overall curve steeper. The 2-year yield is up 0.9 bps at 1.57% and the 10-year yield is higher by 4.0 bps. The overnight move has pushed the 10-year yield above 2.40% for the first time since May 10. The spread between 2s and 10s rose to 82.5 bps, a two-week high.
Yesterday’s Trading Activity – Stocks Slip for First Time in More than a Week: U.S. stocks ended their most recent six-day record-run Monday as shares of technology and industrial companies weighed heavily on the broader indices on the first day of the busiest week for quarterly corporate earnings results. The drag from tech companies led the Nasdaq to a 0.64% drop while S&P dropped 0.40% and the Dow lost a more modest 0.23%. The weakness in equities helped push Treasury yields lower. The 2-year yield dropped 1.2 bps to 1.58% while the 5-year yield ended 2.2 bps but remained above 2.00% (2.02%). The 10-year yield edged down 1.8 bps to 2.38%. The Dollar strengthened against the Euro but was weaker against the Yen and British Pound. The mixed results for the Dollar developed despite more speculation about the impending decision on who will serve as the next Fed Chair. The latest comments from President Trump were that he was “very, very close” in making a decision on who will head the Fed.